yes, it's indeed possible to cash out a life insurance policy through a process known as "life settlement," where the policyholder sells their policy to a third party for more than the cash surrender value but less than the death benefit amount.
In the world of life insurance, cashing out a policy can be a complex decision. Here are some key factors to consider when deciding whether to cash out a cash value life insurance policy.
Firstly, the amount of accumulated cash value is crucial. For a cash out to be worthwhile, the policy must have built up enough value over several years or even decades. This growth is typically seen in permanent life insurance policies, such as whole life, universal life, variable universal life, and indexed universal life insurance.
Tax implications are another important consideration. Withdrawals or surrendering the policy can create taxable income if the amount taken exceeds the total premiums paid. Loans against the cash value are usually not taxable but do reduce the death benefit until repaid.
Early surrender of the policy may trigger surrender charges, which reduce the cash value received. These charges are common in the early years of the policy and gradually decrease over time.
It's essential to remember that taking loans or withdrawing cash value can reduce the death benefit your beneficiaries receive. This reduction is something to consider when weighing the pros and cons of cashing out.
Your financial needs and goals also play a significant role in the decision. If you need cash for emergencies, to pay premiums, or want to redirect funds to other investments with higher returns, cashing out might be an attractive option.
Alternative access options exist instead of surrendering the policy. You might take loans or partial withdrawals that allow access to cash without fully terminating the policy.
The length of time you plan to keep the policy is another factor. It's generally recommended to wait 10-15 years to let cash value grow adequately before cashing out.
Professional guidance is crucial when making this decision. Discussing the decision with a financial advisor and tax professional can help you understand all the consequences and alternatives before cashing out.
If you hold a term life insurance policy without cash value, the typical cash out option involves selling the policy on the secondary market rather than withdrawing cash value.
In summary, the key factors to consider when deciding to cash out a cash value life insurance policy include tax consequences, surrender charges, impact on death benefits, your current financial needs, the policy duration, and professional guidance. It's a decision that requires careful consideration and understanding of the implications.
References:
- Investopedia. (2021). Life Insurance Cash Value. [online] Available at: https://www.investopedia.com/terms/l/lifecashvalue.asp
- Forbes. (2020). The Pros and Cons of Taking Money Out of a Life Insurance Policy. [online] Available at: https://www.forbes.com/advisor/investing/life-insurance/taking-money-out-of-life-insurance/
- PolicyGenius. (2021). Can I Cash Out My Life Insurance Policy? [online] Available at: https://www.policygenius.com/life-insurance/can-i-cash-out-my-life-insurance-policy/
- NerdWallet. (2021). How to Cash Out a Life Insurance Policy. [online] Available at: https://www.nerdwallet.com/blog/insurance/life-insurance/how-to-cash-out-a-life-insurance-policy/
- AARP. (2021). When You Can (and Can't) Take Money Out of a Life Insurance Policy. [online] Available at: https://www.aarp.org/money/insurance/info-2018/when-you-can-take-money-out-of-a-life-insurance-policy.html
- In personal-finance matters, seriously consider the tax implications when deciding to cash out a cash value life insurance policy, as withdrawals or surrendering the policy can create taxable income.
- When evaluating whether to cash out a policy, think about the impact on your personal-finance strategy, as it may be beneficial to redirect funds to high-yield investments like stocks or mutual funds.
- To ensure you're making an informed decision, seek advice from both a financial advisor and tax professional, as their expertise can help you understand all the consequences and alternatives before cashing out.
- In the realm of business, investing in life insurance can provide a valuable safety net, but cashing out could affect the death benefit your dependent organizations may receive.
- If you have a personal-finance app, consult its features for calculating the loans, taxes, and potential impact on your savings and future finance goals concerning your life insurance policy.
